Artificial intelligence (AI) stocks are all the rage with investors these days -- and how can you blame them for their enthusiasm after Nvidia (NVDA 6.18%), the poster child for the AI revolution, more than tripled in price in 2023? Now that the calendar has flipped to 2024, investors are looking for "the next Nvidia," and a lot of them appear to be betting that it will be Advanced Micro Devices (AMD 2.37%), which just announced its MI300X line of accelerator chips.
Not so fast, said Northland Capital on Monday, when it downgraded AMD to "market perform." The stock promptly fell, and was trading down 3.6% as of 2:25 p.m. ET.
Rational or irrational exuberance?
With Nvidia stock up more than 200% over the past 52 weeks -- including more than 20% in 2024 alone -- but AMD up "only" 127%, most investors still seem to agree that the next Nvidia is actually going to be Nvidia. Still, hope springs eternal, and AMD stock has definitely caught a tailwind from its rival's success.
However, for those hoping to repeat the success they had investing in Nvidia last year by buying AMD stock this year, Northland has some cautionary advice: The AI revolution is going to be "really big, just not as big as investors are thinking."
In 2023, you see, amid a mad scramble by companies to get ahold of all the high-powered chips they might need, many bought more than they actually did need. This means that the boom in AI chip demand that began in 2023 might not keep accelerating as fast as investors think. Instead, buying might pause or even retrace a bit as companies digest the inventory they acquired in 2023.
As such, predictions about where that segment of the chip market is headed are showing an interesting divergence: TipRanks recently reported a Melius Research prediction that by 2025, AMD's data center revenue will tip the scales at an incredible $15.5 billion, up from about $6 billion in 2023. Northland, however, thinks it might take until 2027 for AMD to pass the $16 billion mark on AI revenue, as StreetInsider.com reported Monday.
Is AMD stock a sell?
Mind you, $16 billion is a big number, and nearly three times last year's data center revenue for AMD. Northland also does still believe that AMD will get there eventually. It's just that, with AMD stock now valued at a staggering 1,580 times trailing earnings and changing hands for more than twice what it cost a year ago, the analyst believes that a lot of the potential for AMD has already been priced into the stock -- and it's time now for investors to take a breather, count their winnings, and see if things play out as well as they hoped.
That sounds like good advice to me. And with AMD due to report earnings just a week from now, on Jan. 29, this seems like a really good time to pause and wait to see how the numbers look before buying any more AMD stock.
